SAN JOSE – Brocade Communications Systems Inc.’s third-quarter profit topped Wall Street’s estimate as the networking equipment maker benefited from its takeover of a big-selling rival, but was still weighed down by heavy acquisition and legal costs for the court cases of former executives.
The company is profiting from the bustling demand for new data storage technologies as it tries to move beyond a stock options backdating scandal that led to the conviction of former Chief Executive Gregory Reyes on 10 felony counts of securities fraud earlier this month.
Brocade’s net profit for the three months ended July 28 plunged 56 percent, falling to $10.7 million, or 3 cents per share, compared with $24.5 million, or 9 cents per share, during the year-ago period. The year-ago figures do not include the results of smaller rival McDATA Corp., which Brocade acquired for $973 million in an all-stock acquisition completed earlier this year.
San Jose-based Brocade makes switches used to connect corporate servers and data storage systems, and the McDATA takeover gives the combined company 69 percent share of the $1.6 billion market for so-called storage area network switches, according to the market research firm Dell’Oro Group. Cisco Systems Inc., the world’s largest networking equipment maker, comes in second with roughly 26 percent of that market.
Excluding one-time charges, Brocade earned 12 cents per share in the third quarter, a penny better than the average estimate of analysts surveyed by Thomson Financial.
The excluded charges reflect $18 million in legal fees related to the court cases of former executives, $4.1 million in acquisition and integration costs, and various expenses recorded for stock-based compensation for workers.
The options backdating scandal still hangs over the company, though it has had little affect on investors’ perception of Brocade. The company’s market value has increased by nearly $1 billion since the need to restate its financial results was announced in 2005. On Thursday the company’s market value stood at $2.79 billion.
During the height of the dot-com boom, when the alleged options manipulation was taking place, Brocade at its peak was worth nearly $29 billion.
In addition to Reyes, who is appealing his case, Brocade’s former vice president of human resources Stephanie Jensen was also charged by the Justice Department with 10 felony counts of securities fraud, for allegedly doctoring corporate records to hide compensation costs associated with certain stock option awards.
A trial date for Jensen has not been set.
The Securities and Exchange Commission has filed civil charges against Reyes, Jensen, and two former Brocade chief financial officers, Antonio Canova and Michael Byrd. All of the civil cases are still pending.
Yet while legal fees for the former executives continue to cut into profit, investors are optimistic that Brocade can continue expanding by tapping into the need for more data storage capacity and the transition toward new technologies.
Bolstered by the addition of McDATA’s sales, Brocade’s revenue for the period jumped 73 percent, from $188.9 million last year to $327.5 million. That figure was in line with what analysts were expecting.
Aggressive product launches by competitors and possible sluggishness in IT spending by businesses prompted the company to issue a “cautious” financial outlook for the fourth quarter.
Brocade expects profit of 12 to 13 cents per share, excluding one-time charges, on sales in the range of $330 million to $345 million. Those figures were on the low end of the range of what analysts were expecting.
The legal costs for former executives should be similar to the third quarter.
Brocade’s stock gained 8 cents per share, or just above 1 percentage point, to $7.04 in after-hours trading. Before the results were announced, Brocade shares closed up 32 cents, or nearly 5 percent, at $6.96.
